How coronavirus is affecting insurance linked security investments

Insurance Investor: What has Insurance Linked Securities (ILS) activity been like since the COVID-19 pandemic hit global markets?

Nikki Hall-Jones: There has been a short-term pause on some new deals and new issuances, but that will mostly likely change once the market picks up.

This is very similar to what happened during the 2008 Global Financial Crisis.

Despite the recent volatility, you will continue to see a limited impact on ILS because of its low correlation to financial markets.

Insurance Investor: Do you feel that because it is an uncorrelated investment class that investors are starting to look to allocate more towards it?

Nikki: Right now, they are looking just to rebalance and reshuffle and to see how everything stabilizes out.

Possibly in the next quarter or two they could potentially start to look at allocating more, but at the moment everything is really on hold.

It has historically been a stable and attractive asset class that is poised to pick up again, especially given the lower for longer interest rate environment.

Insurance Investor: Has COVID-19 have any impact on ILS?

Nikki: The biggest part of the market for ILS is catastrophe (CAT) bonds, which are triggered from perils such as hurricanes, earthquakes and wildfires, which is not linked to COVID-19.

On the whole, there may be some impact on life/health-related risks and possibly business interruption losses, but that a very small portion of the market.

"Traditional parts of the ILS market, such as CAT bonds,

will continue to see growth."

There was a pandemic bond issued by the World Bank in 2017, which was recently triggered due to COVID-19.

This segment of the market had not gained a lot of traction prior to COVID. That may change given current events, but these bonds tend to be difficult to model and price.

Traditional parts of the ILS market, such as CAT bonds, will continue to see growth.

Insurance Investor: Do you see any changes in the underwriting terms as the market changes?

Nikki: The market has always adapted over the years.

Given the increased severity of natural disasters, continuous modelling has adapted to cover new types of risks and to change the language accordingly.

That language will probably be tighter now for exclusions relating to the pandemic, and especially given what is happening now in the legal system with business interruption.

Insurance Investor: What are some of the concerns and general themes that you are hearing in your conversations with clients when it comes to their ILS segment of their portfolio?

Nikki: The ILS segment has not been a major concern so far, simply because it’s typically not correlated with financial markets.

During the heightened volatility period, there was some initial illiquidity in the secondary market. However, markets have since stabilised and ILS has been relatively immune to any market swings.

Insurance Investor: Is there any fear of future illiquidity in the market, specific to ILS?

Nikki: At the moment, I don’t see a major cause for concern within the ILS segment of the market.

"I see an increased interest in ILS because of this lower for

longer interest rate environment."

This has been a very solid asset class in the past and able to weather market volatility over the years.

ILS weathered the last crisis and I honestly feel that it will continue be an attractive asset class going forward.

I see an increased interest in ILS because of this lower for longer interest rate environment.

As investors start to look for other areas to diversify with attractive returns, the attractiveness of this asset class will continue to grow.